Bajaj Auto - Annual Report - 2008-2009

BAJAJ AUTO LIMITED
(FORMERLY BAJAJ HOLDINGS AND INVESTMENT LIMITED)

ANNUAL REPORT 2008-2009

DIRECTOR'S REPORT

Introduction:

The directors present their second annual report and the audited statements
of accounts for the year ended 31 March 2009.

The highlights are as under:-

2008-09 2007-08
(Nos.) (Nos.)

Motorcycles 1,907,853 2,139,779
Other two-wheelers 11,772 21,316
Total Two wheelers 1,919,625 2,161,095
Three wheelers 274,529 290,312
Total Two & Three wheelers 2,194,154 2,451,407
Of the above, exports were
Two wheelers 633,463 482,026
Three wheelers 139,056 136,315
Total Exports 772,519 618,341

Financials:

Rs. In Million
2008-09 2007-08
Net sales & other income 89,323 91,688
Gross profit before exceptional items, interest 13,140 14,162
& depreciation

Exceptional items
VRS compensation 1,833 1,023
Valuation losses of derivative hedging 218 -
instruments
Interest 210 52
Depreciation 1,298 1,740
Profit before taxation 9,581 11,347
Provision for taxation 3,016 3,788
Profit after tax 6,565 7,559
Disposable surplus 6,545 7,558
Proposed dividend (inclusive of dividend tax) 3,724 3,385
Earnings per share (Rs.) 45.2 54.2

Dividend:

The directors recommend for consideration of the shareholders at the
ensuing annual general meeting, payment of a dividend of Rs.22 per share,
(220 per cent) for the year ended 31 March 2009. The amount of dividend and
the tax thereon aggregates to Rs.3,724 million.

Dividend paid for the year ended 31 March 2008 was Rs.20 per share (200 per
cent). The amount of dividend and the tax thereon aggregated to Rs.3,385
million.

Operations:

The operations of the company are elaborated in the annexed Management
Discussion and Analysis Report.

New projects:

Chakan 4-wheeler plant-The 'Lite' range of 4 wheeler vehicles, both in
Passenger and Cargo segments of the Industry, are under re-design, to
sharpen the competitive positioning of the products.

The Cargo version code named ' PV 1500' is likely to be launched in 2011.

The Techno-economic feasibility for the Passenger 4 wheeler will be
evaluated by Bajaj Renault-Nissan for a final decision, leading to firming
up of the co-operation parameters among partners and a suitable JV
Agreement.

Research & development and technology absorption:

The developments in this area are set out in greater detail in the annexed
Management Discussion and Analysis Report. During the year under review,
your company continued to invest substantially in R & D facilities
resulting in enhancement of its infrastructure for design, prototyping &

testing. Two important products, which demonstrated the technical prowess
of the company, were launched during this year. These were Platina 125 DTS-
si, sporting an enhanced style and XCD 135 DTS-si, a upmarket product.

Your company continues to focus on expanding its design & testing teams,
which has enabled it to make the new generation products. R & D has
enhanced its internal competencies by installation of advanced machines in
proto shop and introduction of special equipments in testing areas.

The expenditure on research and development during 2008-09 and in the
previous year was:


Rs In Million
2008-09 2007-08

i. Capital (including
technical know-how) 310.8 481.4

ii. Recurring 837.9 706.0
1,148.7 1,187.4
iii. Total research
and development
expenditure as a NA NA
percentage of sales,
net of excise duty 1.36 1.37

Conservation of energy:

As a part of continuing efforts to conserve various resources, following
steps were taken to conserve energy

* Electrical energy saving was achieved by installation of localised
portable air compressors at various shops during low production periods,
energy efficient screw compressors by replacing CPT compressors, real timer
electrical circuits installed to switch off electrical equipments during
lunch / tea breaks and during non utilisation of production equipments,
fanless cooling towers for AC plants, high efficiency reflector fittings
with electronic ballasts tube lights, use of LED & CFT street lights,
replacement of 350 W air circulators by 180 W air circulators, 150 W MH
lamps instead of 250 W HPSV lamps at shop floors, Variable Frequency Drives
(VFD) for ASUs in paint shops, washing machine blowers, compressors etc and
rationalisation of pumping hours of main pump as well as booster pump of
pump house;

Water saving was achieved by replacement of old under-ground water pipes
with aboveground pipes to avoid water wastage through leakage, drip
irrigation system for gardening, installation of localised fresh water
storage systems, usage of treated water for bin washing and paint shop
process, rain water harvesting and use of bio-chemical additives to reduce
frequency of water change in various paint processes; and

LPG saving was achieved by installation of waste heat recovery system for
hot water generation used in pre-treatment process of paint shop, use of
reflective coating inside furnaces for better heat retention, three-wheeler
electro-deposition (ED) painting process changed from Acrylic ED to
Cathodic ED, optimisation of loading pattern in CGC and seal quench
furnaces, reduction of hot water temperature for pretreatment, use of bio-
gas for cooking in canteens, startup losses in ovens and hot water
generation plants and changed design of paint jigs to reduce jig stripping
frequency.

Impact of measures taken:

As a result of the initiatives taken for conservation of energy and natural
resources, the company has effected an overall reduction in consumption as
under:-

Reduction achieved in:
2008-09 2007-08
% %

Electrical energy 23 23
Water 11 16
LPG 44 12

Investment / savings:

Investment for energy conservation activities : Rs.9.35 million
Saving achieved through above activities : Rs.24.2 million

Foreign exchange earning & outgo:

The company continued to be a net foreign exchange earner during the year.

Total foreign exchange earned by the company during the year under review
was Rs. 26,819 million, compared to Rs. 20,778 million during the previous
year.

Total foreign exchange outflow during the year under review was Rs 7,286
million as against Rs. 9,261 million during the previous year.

The above outflow includes an investment of Rs.1,378 million (Previous Year
5,692 million) in its 100% subsidiary, Bajaj Auto International Holdings
BV. Netherlands for increasing its stake in KTM Power Sports AG from 24.45%
to 31.72%.

Industrial relations:

At Akurdi, the management signed the wage settlement on 18 July 2008 with
Vishwakalyan Kamgar Sanghatana, the recognised union, in conciliation and
accordingly, the benefits of the settlement have been given to all daily-
rated employees at Akurdi.

Subsequently, with a view to downsizing the workforce at Akurdi, Voluntary
Retirement Scheme was floated for the permanent dailyrated workmen. 2,331
workmen availed of the benefit under the scheme.

Relations with staff and workmen across the plants at Akurdi, Waluj, Chakan
and Pantnagar remained cordial.

During the year, 135 workmen at Akurdi and 16 workmen at Waluj have been
taken into staff category in the vacancies under the staff category in R&D,
PE, TE and MTD departments of the company.

Government of Maharashtra declared 51 Gunwant Kamgars for the year 2008.
Out of these, 11 awards were received by the workers of the Waluj Plant of
the company.

Subsidiaries:

PT. Bajaj Auto Indonesia (PT BAI), was incorporated as a subsidiary company
in Indonesia with an issued, subscribed & paid-up capital of US$ 12.5
million (Rs.562 million) in 2006-07. Bajaj Auto holds 97.5% shares in this
company, with balance being held by a local partner. The subsidiary company
has accumulated losses of Rs. 830.7 million as on 31 March 2009. Through
the efforts, which are planned in the coming years, it is expected that PT
BAI will turn around within a reasonable time.

During the year under review, sales and service network reach have been
expanded substantially covering the major cities of Jawa, Sumatara, Bali
and Sulawesi islands. Total showroom strength stands at around 63 numbers,
covering 46 cities of Indonesia.

PT BAI assembles and markets Bajaj Pulsar and Bajaj XCD in Indonesia,
establishing Bajaj as a high quality tech-savvy brand. PT BAI plans to
expand its presence, product range and reach towards becoming a strong
player in this market currently dominated by Japanese 2-wheeler majors.

Bajaj Auto International Holdings BV, Netherlands (BAIHBV) -was
incorporated as a wholly owned subsidiary company in Netherlands with an
issued, subscribed and paid-up capital of Euros 200,000 during 2007-08.
Further capital of Euro 98.2 million was invested in this company during
the previous year, by way of premium. It is proposed to make strategic
investments in overseas ventures, by way of equity shares and / or loans
and to undertake related activities through this company.

During the year, 21.2 million Euros (Rs.1,378 million) were further
invested in BAIHBV, taking the total investment to Euro 119.6 million
(Rs.7,070 million).

During 2008-09, BAIHBV invested Euro 21.2 million to acquire additional
719,466 equity shares of KTM Power Sports AG (KTMPS), Austria. As on 31
March 2009, BAIHBV owned 31.72% of KTMPS.

The joint development programs are progressing satisfactorily and the
products are likely to be marketed in 2010-11.

Corporate social responsibility:

During the year, your company continued affirmative action and corporate
social responsibility initiatives in various fields.

Code of conduct for affirmative action:

The company continues to place emphasis on inclusive growth and has put in
place certain processes for delivering the intended social outcome in
measurable terms. The company has adopted a voluntary code of conduct for
affirmative action, which is effective from 1 December 2006 and has placed
the same
on its website. The company believes strongly that its competitiveness is
interlinked with the well being of all sections of Indian society and that
equal opportunity for all sections of the society is a component of its
growth and competitiveness. The company will constantly endeavour to ensure
that no discrimination of any type is shown to the socially disadvantaged
sections of the society in the work place. 872 fresh employees were added
during the year. Of this, 99 Nos (11.4%) belong to the weaker sections, in
line with the affirmative action plan of the company. It may be noted that
hitherto, the same was 5.9% in normal course.

Education:

The company has launched a programme that would help SC/ST students achieve
academic excellence and make them on par with those, who can afford
coaching for entrance to IITs. During the year under review, one student
with a brilliant academic record was identified from the underprivileged
and low-income group, for reimbursement of complete fees for the
preparation of IIT entrance test under the guidance of IITians Prashikshan
Kendra.

Under the central government initiative of Public Private Participation
(PPP), your company has volunteered to adopt 3 ITIs (Industrial Training
Institute) for up-gradation:

* ITI Mulshi - A Memorandum of Agreement and Institute Development Plan are
awaiting approval by the central government and funds are expected in the
financial year 2009-10. The construction of a new building at Pirangut is
in an advanced stage and is expected to be occupied by June 2009.

* ITI Haveli - A Memorandum of Agreement and Institute Development Plan are
awaiting final clearance from the central government.

* ITI Ramnager near the Pantnagar Plant (Uttarakhand) - The Central
Government has approved the Institute Development Plan. The Institute
Management Committee has received the funds for the up-gradation. Further
developmental actions are currently underway.

The company organised a two day training program for the Principals,
Instructors and staff of the Institutes. This was done to 'open the minds'
to 'aim high' and receive better ideas and go out and achieve excellence. A
detailed individual action plan was set by each participant for further
action by themselves.

Other social activities:

During the year, our employees volunteered for blood donation camp at
Deenanath Mangeshkar Hospital, Pune and Dr Susheela Tiwari Hospital,
Pantnagar Fire fighting teams of the company along with vehicles responded
to 20 Fire assistance calls from Government Fire Department / other
industrial units outside the factory premises in the larger interests of
saving invaluable life and property.

Community Care:

In line with our commitment to enrich the life of all with whom we deal, we
showed sensitivity to the employees, who opted for voluntary retirement at
our Akurdi Plant.

Soon after the Akurdi employees expressed their interest in accepting the
Voluntary Retirement Scheme, the company organised a series of interactive
meetings with leading financial institutions. The officers explained the
need to prudently and safely invest the monies received, considering the
various options available today.

The company devised attractive schemes for interested employees so that
they could receive regular monthly payments, in addition to lump sum
compensation announced. They were also provided with options of taking
loans at competitive rates of interest.

By these actions, it is the company's endeavour that the employees, who
have accepted

voluntary retirement scheme, are independently self-sustaining and can take
good care of their families. Employees were also guided for alternative
possibilities, whether as employee or entrepreneur.

Health:

Government of India- Ministry of Health and Family Welfare - National Aids
Control Organisation (NACO) and CII have initiated Public Private
Partnership (PPP) in order to provide better healthcare to AIDs patients.
Your company has signed a tripartite MoU with NACO and Yeshwantrao Chavan
Municipal Hospital (YCMH) in Pimpri to set up an Anti Retroviral Treatment
Centre (ART Centre) at YCMH in Pimpri, Pune with the cooperation of Pimpri
Chinchwad Municipal Corporation for HIV patients.

Many dignitaries from Global Fund, WHO and such other organisations have
visited the ART centre, which is the largest unit run by an industry under
Public Private Partnership programme. Apart from two doctors and six
supporting medical staff, the ART centre has added audio-visual facilities
for group counseling, as a result of which the ART centre registration has
reached 1,900 numbers and the unit is recognised today as one of the best
ART centres in the country. Rural and community development activities and
empowerment of women.

The company continued with its rural development activities in Pune and
Aurangabad districts of Maharashtra through its trust, Jankidevi Bajaj Gram
Vikas Sanstha (JBGVS). JBGVS aims at an integrated development of 43
selected villages, to be carried out by the villagers under their own
leadership and through united efforts forged by local organisations with
JBGVS acting as a catalyst.

During the year, JBGVS undertook a number of development initiatives viz.
watershed development, sanitation, healthcare, HIV / AIDs awareness and
prevention, basic education, women empowerment etc. It also initiated
various income generation programmes, supporting 50 self-help groups women
members and developed 400 vermicompost plots. It encouraged and facilitated
entrepreneurship development through projects, like goat rearing, candle
and paper dish production, shops and stalls etc.

Through JBGVS encouragement and technical assistance, 4 educated youths
installed cultivation facilities under polynet and 32 farmers have
established WADI concept mango groves of 20 trees each. NABARD will partner
with JBGVS for a Rs.3.50 crore WADI Project for the next seven years.

The trust supported construction of low cost houses and latrines; conducted
tests and provided treatment during the HIV / AIDs awareness programmes.

Samaj Seva Kendra (SSK) as part of JBGVS provides facilities for social
development of the residents of Akurdi, Nigdi and adjoining townships, with
the aim of improving their quality of life, through skill development
training, hobby centre, nursery education, health care, sports, music,
dance, cultural programmes etc.

Employees Stock Option Scheme (ESOS):

In the present competitive economic environment in the country and in the
long-term interests of the company and its shareholders, it is necessary
that the company adopts suitable measures for attracting and retaining
qualified, talented and competent personnel. An ESOS, designed to foster a
sense of ownership and belonging amongst personnel, is a wellaccepted
approach to this end. In view of this, an ESOS has been proposed, the terms
and conditions of which are being placed for the approval of the members by
way of special resolutions at the ensuing Annual General Meeting. The board
of directors recommends the same for approval.

Directors:

D S Mehta, Kantikumar R Podar, Shekhar Bajaj and D J Balaji Rao retire from
the board by rotation this year and being eligible, offer themselves for
re-appointment.

Sanjiv Bajaj has been re-appointed as Executive Director for a further term
of five years commencing from 1 April 2009 and ending 31 March 2014.

Directors' responsibility statement:

As required by sub-section (2AA) of section 217 of the Companies Act, 1956,
directors state:

* That in the preparation of annual accounts, the applicable accounting
standards have been followed along with proper explanation relating to
material departures.

* That the directors have selected such accounting policies and applied
them consistently and made judgments and estimates that are reasonable and
prudent,
so as to give a true and fair view of the state of affairs of the company
at the end of the financial year and of the profit of the company for that
period.
that the directors have taken proper and sufficient care for the
maintenance of adequate accounting records in accordance with the
provisions of the Companies Act, 1956 for safeguarding the assets of the
company and for preventing and detecting fraud and other irregularities.
that the annual accounts have been prepared on a going concern basis.

Consolidated financial statements:

The directors also present the audited consolidated financial statements
incorporating the duly audited financial statements of the subsidiaries,
viz. PT. Bajaj Auto Indonesia and Bajaj Auto International Holdings BV,
Netherlands and as prepared in compliance with the accounting standards and
listing agreement as prescribed by SEBI.

Information in aggregate for each subsidiary company is disclosed in one
page of the consolidated balance sheet.
Statutory disclosures:

The company has received an exemption from the central government under
section 212 (8) of the Companies Act, 1956 with regard to attaching of the
balance sheet, profit and loss account and other documents of its
subsidiary companies, viz. PT Bajaj Auto Indonesia and Bajaj Auto
International Holdings BV, Netherlands for the year 2008-09. The summary of
the key financials of the company's subsidiaries is included in this annual
report.

The annual accounts of the subsidiary companies and the related detailed
information will be made available to the members of the company and its
subsidiary companies, seeking such information at any point of time. The
annual accounts of the subsidiary companies will be kept for inspection by
any member of the company at its registered office and also at the
registered office of the concerned subsidiary company.

As required under the provisions of sub-section (2A) of section 217 of the
Companies Act,

1956 read with the Companies (Particulars of Employees) Rules 1975 as
amended, particulars of the employees are set out in the Annexure to the
directors report. As per provisions of section 219 (1)(b)(iv) of the said
Act, these particulars will be made available to any shareholder on
request.

Particulars regarding technology absorption, conservation of energy and
foreign exchange earning and outgo required under section 217(1)(e) of the
Companies Act, 1956 and Companies (Disclosure of Particulars in the report
of board of directors) Rules, 1988 have been given in preceding paragraphs.

Directors' Responsibility Statement as required by section 217(2AA) of the
Companies Act, 1956 appears in a preceding paragraph.

Certificate from auditors of the company regarding compliance of conditions
of corporate governance is annexed to this report as Annexure 1.

A cash flow statement for the year 2008-09 is attached to the balance
sheet.

Corporate governance:

Pursuant to clause 49 of the listing agreement with stock exchanges, a
separate section titled Corporate Governance' has been included in this
annual report, along with the reports on Management Discussion and Analysis
and Additional Shareholder Information.

All board members and senior management personnel have affirmed compliance
with the code of conduct for the year 2008-09. A declaration to this effect
signed by the Chief Executive Officer (CEO) of the company is contained in
this annual report.

The CEO and Chief Financial Officer (CFO) have certified to the board with
regard to the financial statements and other matters as specified in clause
49 of the listing agreement and the said certificate is contained in this
annual report.

Secretarial standards of ICSI:

Secretarial standards issued by the Institute of Company Secretaries of
India (ICSI) from time to time are currently recommendatory in nature. Your
company is, however, complying with the same.

Auditors' report:

The observations made in the Auditors' Report, read together with the
relevant notes thereon are self-explanatory and hence, do not call for any
comments under section 217 of the Companies Act, 1956.

Auditors:

The members are requested to appoint Messers Dalal & Shah, Chartered
Accountants, as auditors for the period from the conclusion of the ensuing
annual general meeting till the conclusion of the next annual general
meeting and to fix their remuneration.

Your company has applied for government order to conduct the audit of cost
accounts, maintained by the company for the year ended 31 March 2010. Mr. A
P Raman, cost accountant, Pune has been appointed as cost auditor to
conduct the said audit, and the government approval in this regard has been
received.

On behalf of the board of directors

Place: Mumbai Rahul Bajaj
Date : 21 May 2009 Chairman

Management Discussion and Analysis:

2008-09 has been a tumultuous year for the global economy. The year began
with a continuation of a world-wide inflationary spiral and ended with the
worst slowdown since the Great Depression of the 1930s. While India did not
face a contraction in GDP growth like the USA, the Euro zone, the UK and
Japan, it has witnessed a 250 basis point compression in growth rate - from
9% in 2007-08 to an expected 6.5% or thereabout in 2008-09.

The second half of 2008-09 has seen severe financial distress across broad
sections of Indian industry-especially the manufacturing sectors. Companies
have got re-rated; have scrapped investment plans and capital expenditure;
cut down capacities; struggled with finances because of their earlier over-
leveraged positions; delayed payments to vendors; and had to borrow funds
at prohibitive interest rates.

It is in this context that one must look at the performance of Bajaj Auto
Limited (Bajaj Auto', BAL or the Company'). Despite falling demand in
the motorcycle segment, the company has succeeded in maintaining an
operating EBITDA (earnings before interest, taxes, depreciation and
amortisation) margin of 13.6% of net sales and other operating income. In a
situation where many companies the salient features of Bajaj Auto's
performance for 2008-09 are:

Highlights for 2008-09 versus 2007-08:

Bajaj Auto Standalone.

Net sales (excluding excise duty) and other operating income fell by 2.6%
to Rs.88.11 billion. Exports of two-wheelers - mostly motorcycles - grew by
31% to 633,463 units. Domestic sales of motorcycles (inclusive of excise
duty) fell in value by 20% to Rs.46.59 billion; by volume, it was 1.28
million in 2008-09 - a fall of 23% over the previous year. Despite a sharp
decline in domestic sales of motorcycles, the company's operating EBITDA
stood at Rs.12.02 billion. The operating EBITDA margin was 13.6% of net
sales and other operating income for 2008-09, and recorded a 15.2% margin
for Q4, 2008-09. Operating profit before tax (PBT) fell by 16.4% to Rs.8.46
billion. This was largely due to a voluntary retirement scheme (VRS) of
Rs.1.83 billion and mark-to-market losses of Rs.218 million. Even so, the
operating profit margin was 9.6% of net sales and other operating income.
Surplus cash and cash equivalents in the company's balance sheet as on 31
March 2009 stood at Rs.9.33 billion. are suffering from a severe financial
crunch, Bajaj Auto remains debt free. Whereas many companies have been
forced to delay payments to vendors, Bajaj Auto has gone the other way -
helped its suppliers and dealers by offering improved payment terms.
Instead of cutting back on investments, the company has proceeded with its
business plans, including a spend of Rs.1.4 billion to raise its stake in
the Austrian motorcycle company, KTM, from 24.45% to 31.72%. All this has
occurred from Bajaj Auto's internal accruals.

As in earlier Annual Reports, this chapter moves on to markets, then to the
company's sales across segments, then to operations, and finally to the
financials.

Markets:

Motorcycles: Overall:-

Two-wheeler sales of Indian players is dominated by the domestic market
and, within it, by motorcycles. After growing at a sharp clip from the late
1990s, motorcycle sales witnessed a 7.8% drop in volume in 2007-08, due to
falling domestic demand as a result of rising interest rates and many
private sector banks reducing their retail lending exposures. 2008-09 saw a
modest increase in motorcycle sales of 4%, driven largely by growth in cash
sales. Even so, sales of motorcycles (both domestic and exports) in 2008-09
has been lower than what it was in 2006-07, before the slowdown hit this
sector. Chart A depicts the data from 1998-99.

Table 1: Motorcycle sales, domestic and exports (in numbers):

Year Ended Salse Sales BAL (nos. BAL's BAL's
31st March (nos. growth Millions) growth market
Millions) share

2003 3.757 31.3% 0.868 32.3% 23.1%
2004 4.317 14.9% 1.024 17.9% 23.7%
2005 5.218 20.9% 1.450 41.6% 27.8%
2006 6.201 18.8% 1.912 31.9% 30.8%
2007 7.100 14.5% 2.379 24.4% 33.5%
2008 6.544 (7.8%) 2.140 (10.1%) 32.7%
2009 6.806 4.0% 1.908 (10.8%) 28.0%

Sales growth:

Source: SIAM and Company data:-

Motorcycles:

Domestic Sales for the Industry:-

The company classifies motorcycles into three segments, based on consumer
categories and approximate price points. These are:

a) Entry segment. These are typically 100 cc motorcycles at a price point
in the neighbourhood of Rs.35,000. Bajaj Auto is in this segment through
the Plating. Here, Bajaj Auto has been a major player and, despite an
overall market de-growth, accounted for 34% of this segment in India in
2008-09.

b) Executive segment. This largely comprises 100 cc to 135 cc motorcycles,
priced between Rs.40,000 to Rs.50,000. We are in this segment with two
brands: XCD and Discover.

c) Performance segment. These are sleek, high performance, with price
points in excess of Rs.50,000. We are present here with our flagship brand,
the Pulsar, and our cruiser, the Avenger. We dominate this space, with a
domestic market share in excess of 47%.

If the domestic motorcycle market is segregated as above, it becomes clear
that industry sales showed significant ups and downs in 2008-09. Chart B
plots the data for the industry as a whole.

Soume SIAM:

The industry as a whole was growing at a fairly reasonable rate in the
first half of the fiscal year. Average monthly sales during Q1 2008-09 was
3.3% higher than that of 2007-08; and in Q2 2008-09 it was 5.8% greater
than the previous quarter.

Then came the hit in the third quarter, coinciding with the global
financial meltdown and very sharp cutbacks in the availability of consumer
and retail credit. As a result, overall domestic sales of motorcycles fell
by over 17% in Q3 2008-09 versus Q2 - from an average of 524,939 units per
month to 435,114.

Thankfully, there was a recovery in January to March 2009. Average monthly
sales rose 12.7% in Q4 2008-09 compared to Q3. Even so, the Q4 sales were
less than what the industry witnessed in Q2, or even Q1. Because of the
third quarter effect, domestic sales of motorcycles for the industry as a
whole grew by just 1.2% in terms of volume.

Motorcycles:

Domestic Sales for Bajaj Auto:-

Using the three-fold classification described above, Chart C plots Bajaj
Auto's domestic sales of motorcycles over 2008-09.

As with others in the industry, the company suffered from the Q3 effect. In
that single quarter, Bajaj Auto's motor cycle sales by volume dropped by
37% - from an average of 130,800 units in Q2 2008-09 to 82,024 units in Q3.
The sharpest drop was in the entry level segment, which fell from an
average monthly sale of 49,807 units in Q2 to 17,147 units in Q3 - a
reduction of 66% over two successive quarters.

The two other segments also showed declining sales, but nowhere near as
sharply as the entry level.

There have been some signs of recovery since then. Thanks to an excellent
launch of the XCD 135 cc in February and sales in excess of 21,000 units
per month in the February and March 2009, the executive segment is back on
the growth path. Demand for our Pulsars has also picked up, resulting in a
4% growth in the sales volume of our performance segment offerings in Q4
2008-09 compared to Q3. The full impact of the XCD 135 cc will be apparent
in 2009-10; and this will be supplemented by our launch of the new Pulsar
models in May 2009.

While the company commands a significant market share at the entry level
segment (34% in 2008-09), its sale of Platina 100 cc showed a decline of
almost 37% by volume. The sharp contraction of retail credit by Indian
banks, especially to the relatively less well off, has been a significant
factor in reduced sales in the aggregate as well as for Bajaj Auto. The
silver lining is that since Platina is a low margin product, this
substantial fall in growth has not proportionately reduced Bajaj Auto's
operating EBITDA margins.

On the positive side, we have improved realisations in this segment through
marketing initiatives, improved operations at our Pantnagar plant, as well
as the launch of our Platina 125 DTS-Si with better margins. With financing
support from Bajaj Auto Finance, we expect to at least hold on to the
average monthly volumes of 2008-09 in the entry segment, if not grow them.

Bajaj Auto has not been a dominant player in the executive segment, where
it accounted for under 18% market share in 2007-08. However, this fell to
15% in 2008-09 due to intense competition from the market leader and the
fact that we did not have a major new offering in the category in the first
three quarters of 2008-09.

With the successful introduction of the XCD 135 in February 2009, and the
proposed launch of new models from Q2 2009-10, we hope to rectify this
situation.

While it might be early to say, there are signs of a re-bound. In December
2008, Bajaj Auto's domestic sale of motorcycles hit a low of 61,546 units.
It picked up to 66,207 in January 2009; then jumped to 90,473 in February
thanks to the launch of the XCD 135 cc; and rose further to 92,947 units in
March 2009. With the introduction of upgraded Pulsar models in May 2009 and
brand new models planned for the executive segment in the second quarter of
2009-10, the company expects sales to recover in the course of the year.

Exports:

The company continues to be the country's largest exporter of two- and
three-wheelers. During 2008-09, Bajaj Auto' international sales achieved an
all-time high of 772,519 units of two- and three-wheelers - representing a
growth 25% over the previous year. The growth was driven by the export of
two-wheelers, which increased by 31% over 2007-08 to achieve sales of
633,463 units in 2008-09. Table 2 gives the data.

Table 2: Bajaj Auto's exports (in numbers):

Product 2007-08 2008-09 Growth

Total two-wheelers 482,026 633,463 31

Three-wheelers 136,315 139,056 2

Total vehicles 618,341 772,519 25

The total value of exports was Rs.26.4 billion, representing a growth of
29%.

The business continues to enjoy a healthy geographical spread. Growth in
2008-09 was primarily driven by expanding Bajaj Auto's footprint in Africa
and the Middle East, where the region's share rose from 30% of the export
business in 2007-08 to 43% in 2008-09. The share of South Asia (excluding
India) stands at 27%; South-East Asia at 11%; and Latin America at 19%.

The increased presence in Africa was primarily due to 91% growth in Nigeria
- from approximately 75,000 two- and three-wheelers in 2007-08 to 143,500
units in 2008-09. In addition, there has been growth in sales in Angola,
Uganda and Kenya. Sales in South Asia grew by 8%. The slowdown in Sri Lanka
was more than compensated by a 47% growth in exports to Bangladesh. Despite
the financial crisis, South-East Asia grew by 7%. The company's subsidiary
in Indonesia, PT BAI, clocked sales in excess of 19,000 units. In the
latter half of the year, it launched the XCD 125. The focus is on building
the Pulsar brand throughout Indonesia.

Latin American sales commenced well at the beginning of 2008-09, but then
got negatively affected by the global meltdown and sudden curtailing of
bank finance. Consequently, the region clocked a negative growth of 5%.
However, given Bajaj Auto's strong brand presence in these markets, it is
expected that the company will be again able to ramp up the volumes as the
markets ease.

As a part of the company's policy to be closer to the markets in which it
operates, Bajaj Auto has offices in Monterrey (Mexico), Dubai and Colombo
(Sri Lanka) in addition to its subsidiary PT BAI in Indonesia.

Three-wheelers:

The company's domestic sales of three-wheelers in 2008-09 was 12% lower
compared to the previous year, and stood at 135,473 units. Export demand
grew at 2% to 139,056 units (see Table 2 above). However that was not
sufficient to prevent a decline in the company's total three-wheeler sales
- which fell by 5.4% to 274,529 units in 2008-09. Given that total industry
sales shrank by 1.6% in 2008-09 over the previous year, while Bajaj Auto's
fell by 5.4%, the company's market share dropped by 2.3 percentage points
to 55.1 %. At this market share, however, Bajaj Auto remains the leading
threewheeler player in India. Table 3 gives the data.

Table 3: Three-wheeler sales (in numbers):

2007-08 2008-09 Rate of growth
Passenger vehicle sales:

Industry sales 375,180 415,411 10.7%

Bajaj Auto sales 263,598 264,332 0.3%

Bajaj Auto market share 70.3% 63.6% (6.7%)

Goods carriers:

Industry sales 130,826 82,382 (37.0%)

Bajaj Auto sales 26,714 10,197 (61.8%)

Bajaj Auto market share 20.4% 12.4% (8.0%)

Total 3-wheelers:

Industry sales 506,006 497,793 (1.6%)

Bajaj Auto sales 290,312 274,529 (5.4%)

Bajaj Auto market share 57.4% 55.1% (2.3%)

Source: SIAM and Company data.

The heartening news for this segment is that state governments have
increased the permits for plying energy efficient three-wheelers. Bajaj
Auto has a market share in excess of 90% in the permit-driven markets. The
company also intends to introduce a RE Diesel upgrade in 2009-10, which
will have a high mileage, accommodate more passengers with a luggage hold
area, and will attempt to capture a larger share of the rural market.

Spare parts:

Automobiles need periodic replacement of parts. Not surprisingly,
therefore, spare parts comprise a profitable business for major automobile
manufacturers.

The objectives of spare parts business of Bajaj Auto are to perform an
effective role in supporting new vehicle sales, maintain vehicle goodwill'
across different geographies, makes and consumer groups, and contribute to
the bottom-line. These translate into three goals:

* Make spare parts available to customer at all time.

* Make them affordable.

* Achieve profitable business growth and greater penetration.

The company's spare parts business has done well. Domestic sales of spare
parts grew by 17.5% to achieve a revenue of Rs.5.88 billion in 2008-09. And
exports rose by 84% to Rs.1.45 billion.

There is huge head room for further growth of this business. Even today,
despite significant expansion of Bajaj Auto's authorised service network,
more than 70% of the services during post-warranty period happens in the
neighbourhood private garages. Hence, the challenge - and the business
opportunity - is to make the company's spare parts available in not only
the authorised service centres but also the private garages and spare part
shops that dot the country. This is a high volume, credit intensive
business that requires mastery over the supply of heterogeneous products.
To do so, Bajaj Auto created a separate channel exclusively for
distribution of spare parts in 2004-05. Today, the channel has 73
distributors, who cater directly to over 15,000 retail shops across the
country. This channel now accounts for over 70% of total spare parts sales
of BAL.

The results demonstrate the success of the channel; and the data suggests
that there is still scope for significant growth.

Operations:

Plants:-

Bajaj Auto's vehicle manufacturing capacity stands at 3.96 million units -
comprising 3.6 million two-wheelers and 360,000 three-wheelers. The newest
plant at Pantnagar (Uttarakhand) has a capacity to produce 900,000 two-
wheelers. Table 4 gives the capacity data.

Table 4: Bajaj Auto's plant-wise capacities (in units):

Plant 2007-08 2008-09

Waluj 1,860,000 1,860,000
Chakan 1,200,000 1,200,000
Pantnagar 900,000 900,000
Total 3,960,000 3,960,000

As mentioned in last year's Annual Report, the company's first plant at
Akurdi was shut down as a vehicle assembly unit from September 2007. The
reason for doing so was the higher cost of manufacturing, which placed this
location at a disadvantageous position compared to the other facilities of
Bajaj Auto. On 25 July 2008, 2,331 workmen from Akurdi responded to a
voluntary retirement scheme (VRS) offered by the company. The overall cost
of this VRS was Rs.3.67 billion.

Pantnagar:

Bajaj Auto's production at its state-of-the-art Pantnagar plant
(Uttarakhand) has been on the rise. In 2007-08, the plant produced 276,925
motorcycles. This increased by 15% to 318,321 vehicles in 2008-09. By end-
2008-09, Pantnagar was producing some 40,000 motorcycles per month. To
maximise the tax benefits available at Uttarakhand, the company is shifting
some of its more profitable products to the Pantnagar plant. After the
shift of these products, the plant is expected to produce around 60,000
vehicles by the third quarter of 2009-10.

Table 5 gives the data on which products are manufactured in what plant.

Table 5: Plant-wise product profile:

Plant Products

Waluj Boxer, Platina, XCD and all three-wheelers
Chakan Pulsar, Avenger and Discover
Pantnagar Platina, Platina 125 and XCD

R&D:

In 2008-09, the R&D department has prepared for major upgrades across the
company's product range. It has also enhanced its infrastructure for
design, prototyping and testing. Two of the important products launched
during 2008-09 are listed below.

Platina 125 cc DTS-si:

Platina 125 cc DTS-si brings the twin spark technology with a special focus
on fuel efficiency to the Platina model. The bike has an enhanced style as
well as a new frame to accommodate the DTS-si engine. The engine manages to
maintain the legendary fuel economy of the Platina while giving almost 30%
more torque and 15% more power.

XCD 135 cc DTS-si:

Bajaj Auto developed the XCD 135 cc DTS-si a model that brings excitement
and sportiness to the commuting world. Launched in February 2009, it has
gained considerable acceptance in the market. The XCD 135 cc has several
150 cc features, which give it superior performance and value. The bike is
powered by a 135cc DTS-si engine which gives over 10 bhp of power at 7,500
rpm; 1.18 kg-m of torque at 5,000 rpm; and does 0-60 kph in 8 seconds.
Despite such power and torque, the XCD 135 DTS-si gives a fuel consumption
of 55 km per litre - in the league of a 100cc engine while giving excellent
overall drive feel.

This bike also brings together features like starter motor, five-speed gear
box, split LED tail lamps, Digital speedo with stepper motor controlled
tachometer, nitrogen filled shock absorbers, fat rear tyres and a front
disc brake, DC ignition and DC head lamps. These features make the XCD 135
cc DTS-si a very up market product at extremely affordable prices.

In 2009-10, the company proposes to launch two new models of Pulsar,
including the 220 cc variant, as well as new models to attack the middle
of the market' in the deluxe commuter segment. In addition, it is working
on a new 135 cc model plus a new version of the Avenger.

The 'Lite' range of Bajaj Auto's four-wheeler vehicles, both in the
passenger and cargo segments, are under re-design to sharpen the
competitive positioning of the products. The cargo version is expected to
be launched in 2011.

The techno-economic feasibility for the proposed passenger car will be
evaluated by Bajaj Auto, Renault and Nissan for a final decision - which
will lead to firming up the cooperation parameters among the partners and a
suitable Joint Venture agreement.

R&D has been also focusing on expanding its design and testing teams. It
has enhanced its digital computational capabilities along with the ability
to prototype and test the products to even higher standards. This has
enabled Bajaj Auto to design and produce ready-tomanufacture prototypes for
the new generation products.

In addition, advanced machines have been installed in the prototype shop to
enable quick and precise building and inspection of parts. Moreover, the
testing areas have been enhanced with special equipments to enable
performance and durability testing from component to full assembly -
resulting in end-to-end self sufficiency of R&D department.

Subsidiaries:

Bajaj Auto International Holdings BV (BATH BV):-

As mentioned last year, a 100% Netherlands based subsidiary of Bajaj Auto
(Bajaj Auto International Holdings BV) was formed to focus on international
ventures, including possible acquisitions. In 2007-08, BAIH BV invested
98.36 million (Rs.5.68 billion) to acquire a 24.45% equity stake in KTM
Power Sports AG of Austria, Europe's second largest sport motorcycle
manufacturer. With products such as Motocross, Supermoto, Enduro and onroad
bike products like the Super Duke, KTM is a strong brand in Europe and the
USA. It is a Vienna Stock Exchange listed company.

In the course of 2008-09, BAIH BV increased its ownership of KTM's shares
to 31.72% at a cost of 21.26 million.

PT Bajaj Indonesia (PT BAI):

PT BAI was incorporated in 2006-07 as a subsidiary in Indonesia with an
issued and subscribed capital of US$ 12.5 million (Rs.562 million). Bajaj
Auto holds 97.5% shares in PT BAI, with the balance being held by the local
partner.

The subsidiary assembles and markets Pulsars in Indonesia. During 2008-09,
the XCD was also launched through PT BAI. Being in the early stages of
market development and given that it assembles semi-knocked down parts at
higher customs duties, PT BAI has not yet broken even. However, Bajaj Auto
plans to move into assembling of completely knocked down parts in the
latter half of 2009-10 - which will attract lower duties - and also expand
PT BAI's product portfolio. Given the nature of the business, especially
that of garnering a significant market presence in a new and highly
competitive market, the gestation period is expected to be long. Summarised
Financials.

Table 6 gives the summarised financials.

Table 6: Abridged profit and loss statement:-

Rs. In Million 2007-08 2008-09

Operations

Sales 96,900 90,497

Less: excise duty 10,267 6,127

Net sales 86,633 84,370

Other operating income 3,829 3,734

Total operating income 90,462 88,104

Cost of materials consumed, net of expenditures 65,973 64,491
capitalised

Share of material cost 72.9% 73.2%

Stores and tools 747 604

Share of stores and tools 0.8% 0.7%

Labour cost 3,416 3,544


Share of labour cost 3.8% 4.0%

Factory and administrative expenses 3,031 3,145

Share of factory and administrative expenses 3.4% 3.6%


Sales and after sales expenses 4,359 4,297

Share of sales and after sales expenses 4.8% 4.9%

Total expenditure 77,526 76,081

Operating profit 12,936 12,023

Operating profit as a share of total 14.3% 13.6%
operating income

Voluntary Retirement Scheme 1,024 1,833

Mark to market loss - 218

Revised operating profit 11,912 9,972

Revised operating profit as a share of total 13.2% 11.3%
income

Interest 52 210

Depreciation 1,740 1,298

Net operating profit 10,120 8,464

Non-operating income
Income 1,227 1,219

Expenses 102

Non-operating income, net 1,227 1,117

Profit before taxation 11,347 9,581

Provision for taxation 3,788 3,016

Profit after taxation 7,559 6,565

Less: Prior period expenses 1 20

7,558 6,545
Foreign Exchange Transactions:

The Board of Directors of Bajaj Auto has approved the company's foreign
exchange management and risk policy. In line with this policy, Bajaj Auto
covers its foreign exchange exposure only in the currency in which it
transacts the underlying export business. Thus, it does not enter into any
cross-currency derivative contracts.

Given the rising trend of the Indian rupee in the second half of 2007-08,
Bajaj Auto had taken a forward cover for part of its exports at an average
rate of Rs.40.27 = USD 1 for the whole of 2008-09. At this average rate,
the company covered its budgeted costs and profits. However, with the rupee
depreciating sharply starting from April 2008, Bajaj Auto lost an
opportunity to make extra profits on the treasury side. This opportunity
cost was Rs.2.91 billion.

For the next year, i.e. 2009-10, the company has entered into a Range
Forward-Options Contract. What this means is that if the rupee remains
within the range, the company will get the benefit of the spot rate. For
example, for a Range Forward-Options Contract of Rs. 47 to Rs. 57 per USD,
if the rupee goes below Rs. 47 to a dollar, the company gains by being
protected at Rs.47 = USD 1. However, if it weakens and goes above Rs.57 to
a dollar, the company loses the difference. These are zero cost options.

Operating Working Capital:

Table 7 gives Bajaj Auto's operating working capital. In the cash strapped
situation of H2 2008-09, the management consciously took a call to support
its vendors, by significantly reducing payment cycle. This, and the rise in
export debtors, shows up in an increase in operating working capital as at
31 March 2009.

Table 7: Operating working capital:

As at 31 March
2008 2009
Current assets:

Inventories 3,496 3,388

Sundry debtors 2,753 3,587

Cash and bank balances 561 1,369

VAT receivable 1,311 1,408

Excise duty receivable on export 399 2,061

Other current assets 2,728 3,239

Sub-total 11,248 15,052

Less: Current liabilities

Sundry creditors 8,788 8,000

Annuity payable 657 2,813

Advance against orders 948 1,196

Other current liabilities 1,032 1,598

Sub-total 11,425 13,607

Working capital (177) 1,445

Consolidation of Accounts and Segment Reporting:

Bajaj Auto has consolidated the financial statements of subsidiaries in
accordance with the relevant accounting standards issued by Institute of
Chartered Accountants of India. The summary of the consolidated profit and
loss account for 2008-09 and 2007-08 is given in Table 8 below.

Table 8: Segment Revenue and segment results:


Segment Revenue:- (Rs. millions)
2007-08 2008-09

Automotive 90,413 88,148

Investment and others 1,227 1,219

Total 91,640 89,367

Less: Intersegment revenue - -

Total 91,640 89,367

Segment Results:

Profit/(loss) from each segment
before interest and tax:-

Automotive 10,000 7,366

Investment and others 1,227 1,117

Total 11,227 8,483

Less: Interest 52 219

Profit before tax 11,175 8,264

Cautionary Statement:

Statements in Management Discussion and Analysis describing the company's
objectives, projections, estimates and expectation may be forward looking'
within the meaning of applicable laws and regulations. Actual results might
differ materially from those expressed or implied.